Monday, April 30, 2012

All too many startups are founded simply on the basis of a new and exciting technology invented by an industrious technologist. This is the origin of the “solution looking for a problem” and “if we build it, they will come” syndromes, which result in surprise and frustration waiting for funding, and waiting for customers that don’t materialize.

The right approach is to start by solving a problem causing real pain to a large number of customers willing to pay real money for a solution. Develop the solution with your technology, and develop a strategy to maximize your impact in the marketplace. I’ve talked about the solution part several times, so this article will focus on the value of a strategy.

Here are five good reasons for setting the strategy early, as summarized by Mark Thompson and Brian Tracy in their recent book “Now, Build a Great Business!” They emphasize that before the “What” should come the “Why?” Although their book is written for businesses of all sizes, I believe the principles apply especially to startups as follows:

Increase return on equity invested. The first purpose of a strategy is to organize and reallocate your resources to increase return on the amount of money invested in your startup to-date. It is to earn more bottom-line profit-ability than a random walk.

Position yourself relative to your competitors. Business strategy allows you to change customer perceptions and responses to your product or service offerings. Don’t simply become a “me too” offering, but work on innovative approaches and changes in customer preferences that may not yet be covered by competitors.

Capitalize on strengths and opportunities. You must take advantage of those special team talents and product capabilities that make your startup superior to your competition, and do things that your competition cannot duplicate in the short term.

Form a basis for making better decisions. All strategic and business thinking must lead to immediate action to increase sales and profitability potential, relative to your competition. No strategy leads to no decisions or poor decisions.

Attract investors and financing. Look at your startup through the eyes of a potential lender or investor, and create a strategy and plans that make your company an attractive place to invest. The startups that typically receive the most dollars in first-time financings are ones that have at least four things going for them:

Experience in related fields. Investors highly prize gifted leaders who are business veterans with experience in similar ventures, who can move quickly and effectively.

Great business model. Your offering should open new, large markets in ways that are tough for competitors to copy quickly.

Scalability. Show that your business can build the necessary products and services rapidly and achieve economies of scale with minimum capital and labor.

Intellectual property (IP). Patent protection is no guarantee, but it does improve the chances of building businesses that have a sustainable competitive advantage.

Your business strategy starts with your value proposition and core competency. Most startups that find themselves struggling have a weak value proposition. This is why your value proposition is a critical piece of business strategy.

A successful startup, like chess, requires proper strategy, risk assessment, and effective decision making. Your focus on the end goal will dictate the choices you make, the ability to stave off threats, and lead to your success. Now it’s your move.